3-1-16 – Where is the market going?

Stocks opened higher on the first trading day of March and the rally is gathering some momentum into midday Tuesday. The S&P 500, which shed 8 points in February, is up 33 points to 1965.23 and near session highs.

Meanwhile, Treasury bonds have erased morning gains and are lower across the curve in the wake of better-than-expected Construction Spending and ISM manufacturing numbers. The yield on the benchmark ten-year was as low as 1.73% earlier today, but is now at 1.82%.

Meanwhile, crude oil is up 55 cents to $34.30 a barrel and gold has given back $1.5 to $1233 after a $14 uptick Monday.

On Wall Street, nine of ten market sectors are higher, led by solid gains in Financials (XLF), Technology (XLK), and Basic Materials (XLB). Utilities (XLU) are modestly lower.

Meanwhile, CBOE Volatility Index (VIX) is off 2.18 to 18.37 and making a decisive move below 19 for the first time this year. At the same time, overall options volumes are picking up from a very slow pace seen Monday. 4 million calls and 3.5 million puts traded. Still, projected volume for the day is less than 15 million contracts and 10% below the one-month average.

Marathon Oil (MRO) Apr 5 puts, SPDR 500 (SPY) Weekly 195 calls, and PowerShares QQQ (QQQ) Mar 96 puts are the most actives through midday.

The big decline in VIX, to fresh 2016 lows, is a sign that risk perceptions are easing heading into the new trading month. Volatility of Volatility Index (VVIX) is at its lowest levels since August. While VIX measures the expected or implied volatility priced into a strip of S&P 500 Index (SPX) options, VVIX is applies the same methodology to VIX options.

The improved sentiment reflected in the volatility indexes stands in stark contrast to the bearish underlying tone a couple of months ago when the market was bracing for the first round of fourth quarter earnings report. Indeed, the S&P 500’s rally off the February 11th lows occurred at the very tail end of the reporting season when focus started to shift back to crude oil, Fed policy, and other macro events. Since today is also Super Tuesday, diminishing concerns about the uncertainty along the political landscape is perhaps fueling the bullish move in equities as well.

Yet, the elections are far from over and the next FOMC meeting is soon in focus, as the committee makes its next announcement on March 16th. At the same time, while crude oil remains unpredictable, the bigger hurdle for the equities market is the next reporting season, as analysts expect to see first quarter results 6.1% below a year earlier. The trend of negative earnings growth is expected to continue into the second quarter.

Until then, the underlying tone has certainly improved after the S&P 500’s 7.5% rally off February 11th lows. Today’s move has led to a decisive break of the 50-day moving average, where there is notable support at the 1940 level (as it also coincides with January resistance highs). 1950 is a more immediate support level and today’s high of 1970 is the most likely short-term resistance area. A break beyond that level sets up a test of 1990 and, more importantly, the 2000 level.

Crude oil remains a wild card and Friday’s jobs numbers hold important implications for Fed policy. ADP gives the first peek at the February jobs numbers Wednesday morning.